Burj Khalifa
Turner Construction Company
Executive Summary Turner’s business philosophy is to work very closely with customers on all its projects. It strives to share the most up to date and accurate information with them. Thus, making customers a partner in the business risk and rewards. It also empowers its employees to record accurate information by decoupling individual bonuses from project performance and tying it to overall corporate performance. It has a well-structured management control system through Indicated Outcome Reports which help Turner to identify and manage not only the risks but also potential savings in the projects. We recommend that Turner could release $200,00 of C-holds and balance $300,000 from construction contingency. This is keeping in mind that it is a new customer and releasing the funds would help Turner in further nurturing the relationship. However, it needs to keep a close watch on scope enhancements being approved by owners and cost control.
Turner: Background and Simon’s perspective Core Values Turner’s business model revolves around the following core values:
Make clients your partners It works very closely with the owners and makes them partners in managing the project. Through regular status updates, it keeps them informed about potential risks and cost savings that might incur. It uses customer engagement as an effective medium to manage not only project risks but also reputation risk in the market.
Employee Empowerment Decentralized organization structure in Turner empowers its employees to capture and report accurate information. There are various control systems in place that encourage employees not to play with numbers e.g. the cost engineers who produce reports don’t report to line management and hence have no motivation to hide bad news.
Risks & Uncertainties Though Turner is in construction business, it is actually an expert in managing risk, not just for its clients but also itself. The risk areas include:
Cost overrun risk On any given project, Turner performs less than 10% of the overall work using its own staff. The rest is completed using hundreds of contracted staff whose activities must be coordinated with close precision to avoid cost over runs. The very nature of this model has a risky nature and strongly depends on Turner’s ability to manage its relationships with subcontractors
Loss of market reputation risk Any cost over-runs, project delays, inaccurate information shared with the clients could lead to not only severe loss of business but also market reputation. This is where Turner uses client engagement as a very effective tool to manage the risk. Since the clients are involved very closely throughout the project, they are constantly aware of any issues with the project while Turner works with them to minimize any loss or damages in crisis situations.
Frequent changes in the scope
Lot of time being invested in updating IOR and decision making later on
Not all cost engineers are equally adept at making IOR
Accuracy of IOR is extremely important since other management control reports such as Operations report, Turner Forecasting System(TFS) are outputs from IOR
Control Systems Diagnostic Control Systems
Corporate Goals The corporate office assigns each of the 28 territories with earnings guidelines and constantly works with them to ensure that the projections are met.
Constant review of project financials Turner constantly monitors and revises (if required) financials for each project through a series of continuous meetings at various levels. Staff from different
business areas is involved in costing to accurately determine the forecast before it is passed on to corporate. The Indicated Outcome Reports (IORs) are the basis for other management control outputs. Belief Systems
Heavy cross-training and promotions from with-in Through both of these measures, Turner’s managers have a deep level of comfort with its way of working and reporting the numbers. Majority of the senior project team has worked at one point in the IOR department and have learned a real respect for the cost side of the business.
Performance evaluation It is a very subjective process at Turner. The bonus is not tied to individual project profitability and this discourages managers to report wrong numbers. Bonuses throughout the company are tied to corporate performance and subjective evaluation. This further inculcates management’s strong belief in reporting accurate numbers into the employees.
Boundary Systems
Contingency holds in IORs Turner uses E-holds and C-holds to make sure that it doesn’t have to dip into its project earnings to make up for unforeseen risks. The project executives and managers are under strict instructions to protect earnings under any circumstances. They are highly encouraged to report any risks at the earliest so that they can be taken up with the owners.
Interactive Control Systems
IOR Cover Letter discussions The cover letter gives territory and corporate management not only a concise view of the project’s financial situation but also addresses the reasons for major changes and key assumptions.
Frequent review of project financial with team and IOR evaluation
Data generated by IOR report is discussed and interpreted in face-to-face meetings of superiors, sub-ordinates and peers
IOR review system questions the assumptions and act a catalysts for further debates
Critical Performance Variables
Some of the performance variables to be monitored include
Cost to perform the job
Contingency reserve
C-Holds and E-Holds
Quarterly earnings projects for Turner
Data on cost-overrun
Indicated Outcome Report Tuner gains a competitive advantage in market not through low price offerings but through value-based offerings. IOR is the key project management tool used in Turner Construction Company to monitor and manage the manage risk and at any time provide themselves and the owner of the project with a prediction on the cost to complete the project. The cost department prepares Indicated Outcome Reports (IORs) that monitor the cost for all active construction projects and provides timely financial data that is required for Turner's Forecasting System (TFS).
Heart of Management systems
Indicated Outcome Report(IOR)
Backbone for formal reporting systems
Forward looking project managemnet tool
These reports support Turner in their strategy implementation to make owner their partner through accurate information sharing. IOR helps them to decide when and how to tell an owner on the expected savings and hence facilitate collaboration and sharing of project savings. Another important part of the IOR is the E-Holds (Exposure Holds) and C-Holds (Contingency Holds). E-Holds are reserves that are kept for specific types of jobs on the project. C-Holds are reserves that are kept for more general and generic expenses that may arise. Other advantages of IOR includes
Best-efforts prediction at any point of time of the total expected costs and earnings contribution of a completed project
Provides early warnings about critical risks
Raises red flags to enable the managers to ask the right questions
Represent the dollar flow from Owners to sub-contractors and suppliers (inflowoutflow)
Basis for monthly territory earnings report and corporate earnings projections
Forces managers and the whole project team to discuss and address all the contingencies
Appraisals/bonus payouts of managers not tied to project profitability. Hence no fear for managers and executives in admitting the problems
Integrity of IOR system is extremely valued by the project management team
IOR summary documents provides corporate management a concise outline of Turner’s financial position on the project
IOR evaluation process
Meticulous and lengthy review of IOR by the Turner team including cost engineers, project executives, managers and group/division managers
Cost engineers do not report to line managers to ensure objective reporting without biases. (to prevent principle-agent problem)
Project team anticipates financial and operational problems and makes provisions for contingencies. Managers play’ devil’s advocate’ to validate assumptions
Managers use their intuition and gut feel based on previous experiences to arrive at IOR estimates
Cost engineers visit project locations to ensure data accuracy
Quality of data is evaluated/ scrutinized at multiple points to ensure accuracy.
Thus Indicated Outcome Reports provides Turner a very mature management control systems to evaluate financial and operational issues and risks during project execution. Concerns Still there are areas of concern in the present IOR system including
All cost engineers are not equally adept at preparing IOR reports and summaries. Need more cross-trainings for the cost engineers.
Need to convert IOR generations and evaluations as objective as possible.
Current system of updating IOR is a tedious and time-consuming process.
The $500,000 Dilemma Currently Kent Square project has $471,000 in E-hold, $328,000 in in C-hold and $511,000 in Construction contingency. The advantage of Turner releasing the money includes
This would please senior management because they could recognize earnings this quarter
The customer would be happy because he was able to pay off his other loans.
Considering that the owner is a new customer, potential for future businesses is high.
Since the project is only 80% complete and there are 5 months till project completion, the risks of unanticipated issues and cost overruns cannot be negated. If expenses do end up higher than expected, they will adversely affect Turner’s earnings projections and shareholder value. Other concerns against releasing of money involve
Scope changes continue till date-result in scope-creep and cost overruns.
Possibility of a local strike-results in overtime labor
Need for extra clean-up funds
Considering the above uncertainties, releasing the entire construction contingency will not be wise. As per case facts, E-holds are reserves earmarked for trade-specific expenditure and are more likely to be spent. Thus it is recommended to keep the E-hold as it is to manage the unexpected expenses. Thus it is advisable to release a portion of C-Holds and Construction contingencies to get the total $500,000.
Recommendations
Release $ 200,000 from C-Holds to customer. Balance in C-Hold is $128,000
Release $300,000 from Construction contingencies. Balance in Contingency reserve is $211,000
Maintain E-hold at current level of $471,000 to cover for potential local strike in one of the trades and need for extra cleanup funds.
In addition to releasing the contingency funds as per above, Garry should ensure that different stakeholders are aware of the below caveats: Owners of Kent Square
Limit the scope change approvals by the owner without extra budget approvals.
The ‘actual savings’ will be clear only once the project is completed. Hence any deviations between actual and ‘released money’ will be shared between Turner and customer
Turner Senior Management
E-Hold is kept intact to take care of the future uncertainties
Considering 20% work is being pending, C-Holds and Contingency reserves are kept at $128,000 and $211,000 respectively
Project Team
Ensure the project is completed under close monitoring of expense data
Plan for the risk mitigation plans such as ensuring continued supply of labor at lower costs.
